Bamboozled December 11, 2018: Want to pay less in taxes? Here are last-minute tax tips for 2018

The clock is ticking for taxpayers who want to minimize what they’ll owe on their 2018 tax returns.

Under the new tax law – the Tax Cuts and Jobs Act of 2018 (TCJA) – some of the tax-saving strategies you’ve been using for years won’t help anymore.

The most significant changes, including no longer being able to deduct your entire property tax bill, aren’t necessarily bad news for all taxpayers.

But you’re going to need some new ways to manage your return, and for most action items, you’ll have to do it during the calendar year.

Here’s what you need to know – and what you should do – before 2018 is over.

Itemizing may not work anymore

Beginning in 2018, many taxpayers who have claimed itemized deductions year after year will no longer be able to do so.

That’s because the standard deduction has been increased to $24,000 for joint filers, $12,000 for singles, $18,000 for heads of household and $12,000 for marrieds filing separately, said Gail Rosen, a certified public accountant with Wilkin & Guttenplan in Martinsville.

Many itemized deductions have been cut back or abolished so that, coupled with the new hefty standard deduction, fewer taxpayers will have enough deductions to make it worth itemizing. We’ll get into detail on those in a moment.

Because of the higher standard deduction, the number of New Jerseyans who itemize will fall by 60 percent from 1.6 million to 658,000, according to New Jersey Policy Perspective, a progressive research group.

Personal exemptions were also suspended, meaning you will no longer receive a deduction for yourself, your spouse, qualifying children who are your dependents or qualifying relatives for whom you provided over half of their support, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

“In 2017, you received a deduction of $4,050 for each exemption you were eligible to take,” he said. “The exemption amount was scheduled to increase to $4,150 in 2018.”

But no more.

Changes for deductions

Miscellaneous itemized deductions are suspended. These include common expenses such as tax preparation fees, certain legal and accounting fees, investment fees, custodial and trust account fees and unreimbursed employee expenses.

There’s also no longer a personal casualty and theft loss deduction.

Papetti said under the old law, taxpayers were generally allowed to claim an itemized deduction for uncompensated personal casualty losses including those arising from fire,storm or other casualty, or from theft.

“The new law suspends the personal casualty and theft loss deduction except for those that occurred in a federally-declared disaster,” he said.

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If you’re a fan of Atlantic City, you won’t like this one.

Papetti said in general, gambling losses were only allowed to the extent of gambling winnings, but taxpayers were also able to deduct transportation, admission fees and other connected items.

The new law limits these other deductions as they are only allowed to the extent of gambling winnings, he said.

And gone are the days when you could claim a deduction for moving expenses connected to starting a new job. It’s now only available to members of the armed forces on active duty who move pursuant to a military order, Papetti said.

SALT deductions

The change that’s gotten the most attention is the $10,000 cap on deducting state and local income taxes and property taxes, commonly called the SALT deduction.

There’s been a lot of finagling to try to save the deduction, but the IRS has pretty much knocked those attempts down.

This time last year, taxpayers were scrambling to try to prepay some of their 2018 property taxes so they could have the full deduction one last time, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

That won’t work anymore.

The SALT deduction was taken by 41 percent of New Jersey families, according to New Jersey Policy Perspective.

That number is expected to drop because more families will be taking the standard deduction.

Note that New Jersey has increased the SALT deduction on your state return to $15,000.

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Medical deductions

Deductions for medical expenses have also changed.

It used to be that taxpayers could deduct medical expenses to the extent they exceeded 10 percent of your adjusted gross income, Kiely said. If you were 65 before the end of the tax year, the threshold was reduced to 7½ percent of your AGI.

He said the threshold was scheduled to be 10 percent for all taxpayers for 2017 and later years.

“The TCJA of 2017 reduces the floor to 7½ percent for 2017 and 2018,” Kiely said. “After 2018, the floor goes back to 10 percent for all taxpayers.”

Remember for New Jersey tax purposes, the floor is 2 percent of AGI, so it’s worth keeping track of your unreimbursed medical expenses for your state return, Kiely said.

Changes for charity

The charitable deduction was significantly impacted by the TCJA provisions.

Rosen said she’s advising clients who donate to plan their itemized deductions.

“If they do not have enough deductions to itemize in 2018, they can consider ‘bunching’ their tax deductions,” Rosen said.

Bunching works when taxpayers donate to their charitable organizations in one calendar year versus spreading out their contribution over many years.

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For example, Rosen said, if they were going to contribute to a charity $5,000 in years 2018, $5,000 in 2019 and $5,000 in 2020, they would instead donate it all in one year so they can itemize in that year, and they’d take the standard deduction in the other years.

Another strategy is to give Qualified Charitable Distributions (QCD) from an IRA.

“This means that instead of receiving their mandatory taxable IRA distribution, the money goes directly to charity,” Rosen said. “The IRA distribution is not taxable, and the benefit went to a charity without having to worry about itemizing.”

The old law allowed you to deduct mortgage interest on up to $1 million – or $500,000 for those married filing separately – for loans used to buy, build or improve your primary and secondary home, Kiely said.

This is called “home acquisition indebtedness.”

In addition, he said, you were able to deduct the interest on up to $100,000 of home equity loans regardless of how you used the mortgage proceeds.

The new law reduces the $1 million limit to $750,000 – or $375,000 for those married filing separately – for mortgage loans entered into after Dec. 31, 2017.

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There’s also a big change for home equity debt.

If you have a home equity loan or line of credit, you can no longer deduct interest if the borrowing was for a reason other than to buy, build or improve your home, Papetti said.

So if you use your HELOC to pay for college, for example, or to pay off credit card debt, you can no longer deduct the interest, he said.

The Alternative Minimum Tax

The Alternative Minimum Tax was an alternative tax system created in 1969 to make sure the super wealthy didn’t avoid paying taxes.

It did this by disallowing certain taxpayers from taking some common deductions, such as dependent exemptions, state and local taxes and miscellaneous itemized deductions, Kiely said.

But the problem was that AMT was not indexed for inflation, so in recent years, many middle income taxpayers – for whom AMT was not intended – got caught in the AMT trap.

The TCJA increases the phase out for couples to $1 million and $500,000 for singles, Kiely said, and it’s welcome news to many taxpayers.

“In the past 15 years I received no benefit from personal exemptions or SALT deductions,” Kiely said. “Limiting or doing away with a deduction that I did not benefit from in no way hurts me. For the first time in 15 years I won’t be paying the AMT.”

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Capital gains

The new tax law made no changes to the taxation of qualified dividends or long-term capital gains.

Long-term capital gains from sales of assets held longer than one year are taxed at zero, 15 or 20 percent, depending on the taxpayer’s taxable income, Rosen said.

You should examine your portfolio and see if there are opportunities to lower what you may owe by offsetting any gains with losses.

Also pay attention to your mutual funds, which are required to pay out interest, short-term gains and long-term gains annually.

Most mutual funds pay out the dividends in late December, Kiely said. You can check this on your mutual fund company’s website if you haven’t received notification yet.

“If you see that you are going to receive a dividend, look into tax loss harvesting,” he said. “If you have a stock or fund that has lost money, sell it and use the loss to offset other capital gains and capital gain distributions from your mutual funds.”

If you’re getting divorced

If you and your spouse are splitting, there’s a big change you need to know about.

The new law says that alimony paid as part of any divorce executed after Dec. 31, 2018 will no longer be deductible to the payor or considered taxable income for the receiver.

“This change in the deductibility of alimony may require a significant amount of time to determine and agree on the effective tax rate of both spouses and what the after-tax amount of the alimony should be,” Papetti said. “If the divorce or separation agreement can be executed prior to Dec. 31, I would recommend to do so.”

One way to reduce your taxable income for 2018 is to contribute to a retirement account.

In 2018, the maximum contribution for a 401(k), 403(b) or 457 plan is $18,500, Kiely said. If you are over age 50, you can put in an additional $6,000.

“If you are not on track to hit the maximum, talk to your human resources department and see if you can write them a check to make up the difference,” he said.

Your other option is to contribute to a deductible IRA. You have until the 2019 tax filing deadline to make the contribution.

The deductibility of your IRA contribution will depend on your adjusted gross income and whether or not you contribute to a company retirement plan. See those rules here on the IRA website.

“In 2018, the maximum IRA contribution is $5,500 for taxpayers under the age of 50 and $6,500 for taxpayers age 50 or older,” Papetti said.

Just remember you need earned income to fund an IRA.

Bonuses, other income

Reducing your taxable income is one of the best ways to lower your tax bill.

This move should be part of a larger plan.

“Postpone income until 2019 and accelerate deductions into 2018 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2018 that are phased out over varying levels of adjusted gross income (AGI),” Rosen said. “These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest.”

She said postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.

There could be cases when it may pay to accelerate income into 2018, Rosen said, for example, if a taxpayer will have a more favorable filing status this year or expects to be in a higher tax bracket next year.

If you’re approaching 70 ½ and you’ll have to take Required Minimum Distributions (RMDs) from your IRA, you’ll want to think about the best time to take that money.

The first RMD can be postponed until April 1 of the year following the year you attain age 70 ½, Papetti said.

“If the taxpayer elects to postpone their first RMD to April 1 of the year following attaining age 70 ½, they will need to take a second RMD for the current tax year, resulting in two RMDs in one year,” Papetti said. “This may result in higher taxes if it places the taxpayer in a higher marginal tax bracket.”

Adjust your withholding

The IRS adjusted withholding tables last February to reflect the new tax rates under TCJA, Kiely said, so your take home pay was increased throughout the year.

That means you shouldn’t expect a windfall tax refund

“However, if you are self-employed or otherwise pay your taxes through quarterly estimated tax payments, you may be in for a surprise next April,” Kiely said. “Most income tax software or tax preparers can help you determine how much to pay in for your quarterly payments in 2019.”

If you owe more on April 15 or if you get a huge refund, you should adjust your withholding.

To do so, you will need to complete a new Form W-4 that indicates how many allowances you are claiming, Papetti said.